Meanwhile the various European governments are squabbling like schoolchildren about individual countries breaking ranks and guaranteeing depositors. And last night some major commodity producers lost up to 25% of their market capitalisation in one session. Opportunities for the brave……

They’re forward looking, Fleeced. The current index results is now out the window.

Pom

The world looks like it’s heading pretty quickly in slower growth with serious recession looming. Oil could head towards 50 bucks a barrel. If the producers, now used to maintain a wealthy lfestyle start pumping out oil. I wouldn’t be totally surprised seeing it back at 25 bucks. Wouldn’t that be fun.

Does anyone think there has been some political interference in this decision? Or am I being unduly paranoid?

“HOMEOWNERS are most unlikely to get the full benefit of an expected Reserve Bank interest rate cut this week after a meeting between Bank Governor Glenn Stevens and Prime Minister Kevin Rudd in Sydney on Friday night.

[…] Asked about the meeting, the Prime Minister told The Sunday Telegraph: “Conversations between the Governor and the Government remain confidential.” [How convenient]

[…] But, according to senior government sources, the Prime Minister has declared he’s prepared to take a hit in the polls for taking what he regards as the “responsible”, rather than “populist”, route.” [Really?]

[…] Budget projections for a big rise in migration would also have to be reviewed, he said. Sydney’s west was among areas hardest hit by mortgage stress, he added, and he would look at ways to ease homeowners’ burden. [Like a full one per cent cut in rates, perhaps?]

Does anyone think there has been some political interference in this decision? Or am I being unduly paranoid?
Na. the idiot panicked. I say he’s an idiot because he raised rates far too high when it wasn’t necessary and could have caused long term damage which we will have to wait to see.

We had a dangerously inverted yield curve that is almost scandalous during these times. He shouldn’t be applauded for lowering rates, he ought to be asked why he raised them so high in he first place, as he could have gone to the government and demanded to be taken off the CPI standard when it was clear that energy higher prices were deflationary. If he had even known or understood and even then I have my serious doubts.

you’re being too harsh on the Glenn Stevens and the RBA. only 3 months ago runaway inflation looked to be the problem. now, of course, all is different. he made a mistake and now he’s corrected it. good for him.

if oil falls much further, there is going to be one almighty fist-fight in the oil-producing hell-holes of the world. political change here we come..

By 2010, they will have enough fissile material for their first weapon.

The choke-point for much of the world’s oil is the Straights of Hormuz, an easy target for Iran. Expect falling oil prices to trigger a frantic psychological anxiety in Iran, just as Iran reaches 20,000 spinning centrifuges in their cascade array in 2010.

So, as oil prices decline, a frantic Iranian theocracy will act to keep oil prices high. The imams cannot afford to lose control over their people, and lower oil prices mean sharp cuts in public subsidies, which translates into sharp drops in public support.

We’re in for two tough years ahead, both economically and politically.

I like the 100 point cut. I think it was an appropriate response to a lower credit multiplier. Unlike JC, I don’t think Stevens has done a bad job. His previous decisions were right given the information that he had.

I’m not sure that oil will keep going down. As I understand it, some of the supply is only economical with high prices… so lower prices will lead to lower supply, which should prevent prices falling too much.

Maybe I was being a little too harsh on him, as the rest of the gang were just as bad. the energy spike in my mind was wrongly construed as inflationary when it was actually the opposite. it was a dis-inflationary spike as more resources were needed to buy energy.

The other problem i have with Stevens is monetary policy was clearly too hard seeing we had the most inverted curve in the developed world for a time.

Ia gree with you about oil in the long term. However shorter term it could be a race to the bid by the producers as rising production/supply and falling demand mean a lower price.

Higher prices eventually lead to lower prices and lower prices eventually lead to higher prices… sure.

I too believe the 100 point move was a good one. I think it was shaped very much by overnight events last night, just as much as the outlook. In fact, the longer term inflationary effects have been overlooked in light of the cash market in Australia.

Overnight, the AUD was sold off mercilessly, and given the extent to which our capital markets (not just the banks – they are healthy) are dependent upon foreign capital, the only thing that will keep foreign cash here is the prospect of a healthy sharemarket. Look for them to be supporting the AUD as well in the forex markets.

What of the argument that since Australia is already awash with debt, offering the ‘hair of the dog’ is a mistake?

Also, given the falling dollar and tight credit markets, I was surprised at how quickly the banks agreed to cut their rates by 0.8pp. Sure, not the full one per cent Turnbull wanted, but not too shabby. But then it occurred to me that this could be a political stunt. Lower rates to get the politicians off their backs, but increase lending standards to maintain profitability.

A whole percentage point. Now I’m getting tempted to yank my money out of the bank. Higher risk, lower reward.

It seems that inflation is fashionable again. I now almost regret not getting on the recent property bandwagon. I think Glenn Stephens should be sacked (along with the RBA). However nobody with the power to sack him is commited to low inflation. Glenn obviously knows his politics.

I like the 100 point cut. I think it was an appropriate response to a lower credit multiplier. Unlike JC, I don’t think Stevens has done a bad job. His previous decisions were right given the information that he had.

I don’t think so. He has a narrow task to direct monetary policy to keep inflation within a target band of 2-3%.

The RBA have always used the misguided definition of inflation = CPI.

CPI was screaming above 4.5% earlier this year. I haven’t seen any evidence that it has come down. So why is the RBA comfortable that it can lower interest rates when CPI is well above its target band ?

From my perspective, the entire job of the RBA is a farce.
Inflation is monetary phenomena, and price rises are the symptom of inflating the supply of money and credit.

Even if you are going to track prices, CPI itself is a dodgy measure of prices, it disregards a lot of energy and housing price inflation.

THE International Monetary Fund has warned against allowing banking takeovers that lead to excessive power being concentrated in too few institutions.

Instead, the IMF urges governments to stand ready to take equity stakes in struggling financial institutions, estimating that an additional $US675 billion ($960 billion) in capital needs to be injected.

5% inflation is worrying. There is a strong and obvious case for minimising inflation and deflation over the long run. This would mean more stability in rates over the long run too.

I understand the assumption is that inflation won’t stay high for long given failing businesses, rising unemployment and general contraction. Even if Australia is spared much of that domestically, the currency and trade impact will be deflationary.

Jono, perhaps the RBA is comfortable with the idea that reducing rates will not lead to increasing inflation given the other stuff going on. And perhaps they are thinking that the long term risk is deflation.

Terje, that would only be true if the demand for goods stayed higher than the supply of goods.

Contraction is a decline in supply. We typically measure economic output using GDP. The P stands for production. Demand is merely one manifestation of supply because nobody can trade unless they have something to trade with. Given a fixed stock of money (which is neither desirable nor real but the only fair baseline) then a contraction in output is inflationary. Contraction was inflationary in the 1970s (although money growth contributed also) and it was inflationary during the great plague in Europe in the middle ages.

When Reagan cut taxes in the 1980s one of the arguments made by the Reagan crowd (correctly) was that the extra output this would stimulate would mop up liquidity and bring down inflation. It did.

Economic contractions are inflationary in nature. If we are headed into a contraction loose money is not the answer.

But we don’t have a fixed stock of money. And I know that the P in GDP stands for Product, but why would you have a reduction in production if the result is a relative increase in demand?

I’m arguing because I’ve always read that contractions lead to price reductions (and it makes sense to me given that malinvestments are liquidated and factors of production, like workers, have to find new employment) and the modern problem is the stickiness of wages.

I thought bartercard was a trade exchange with a credit element. Certainly you get trade dollars you can spend with other members.

Today’s AFR had a couple of charts showing US treasury and Australian Govt bond yields. They are falling rapidly which suggests money is flowing out of equities, commodities (and probably real estate as well) and into govt-backed bonds. But especially US Govt bonds.

Thus we are seeing a flight, or is that a stampede(?), to relative safety. The Aussie dollar appears to be caught up in this.

Meanwhile:
NEW YORK, Oct 7 (Reuters) – Unprecedented demand for
precious metals and volatile markets forced the U.S. Mint to cease production for the half-ounce and quarter-ounce popular American Eagle gold coins for the rest of this year and to supply other bullion coins on an allocation basis.

“Due to the extreme fluctuating market conditions for 2008, as well as current market conditions, gold and silver demand is unprecedented and the demand for platinum is unusually high,” the U.S. Mint said Monday in a memorandum to its authorized coin dealers.

I agree that the economy is not static. However the arguement that contractions are deflationary or disinflationary holds no water. Holding over variables constant (ie static) a decline in output will be inflationary. In comment #23 DavidL infered that a bit of loose money now is probably okay because a general contraction will conteract the inflationary effect of loose money. However a general contraction will, like loose money, support the proposition of higher inflation.

If the RBA had cut against the herd mentality amoung central banks and had instead increased interest rates by 1% then the Australian dollar would now be rising in value (disinflation) and Australia would soon be awash with foreign credit seeking a secure port. Not that I’m in favour of manipulating the price of credit in either direction.

Our central bank has just signalled that inflation is back in fashion and it’s political masters have given it the nod. We are now in the process of transfering wealth from lenders to borrowers. The cost of a whole stack of malinvestment is being socialised and redistributed. Not healthy at all.

If the RBA had cut against the herd mentality amoung central banks and had instead increased interest rates by 1% then the Australian dollar would now be rising in value (disinflation) and Australia would soon be awash with foreign credit seeking a secure port.

Yea, really? Terje if by some stroke of idiocy the RBA raised rates instead of lowering them by 1% the Aussie would be even lower. In fact it would possibly have crashed.

How do i know? The Brits tried that shit in the early 90’s when there was an attack on the pound. They raised rates to protect the pound and it fell even further.

There are numerous example of that.

The best indicator is the yield curve. Our yield curve is still extremely invested with the 10 year bond around 4% while day to day cash 6%. It means the RBA is till to tight.

The market perceives the economy here to be weakening fast, the RBA concurs and the yield curve does as a result of its steep inversion. Throwing in a rate hike would be perceived as turning off life support on the patient. There would be a mass of sellers in the Aussie as a result.

it would kill the economy.

That’s also what Mieno did in Japan in the 90’s and that alone helped keep Japan in permafrost for about 5 years.

It may (or may not) kill the economy. However that wasn’t the point in contention. The issue was whether a general contraction is going to counteract the effect of loose money. I argue that far from counteracting the effect it will assist the effect. In other words both loose money and economic contraction are inflationary.

And your point about an interest rate hike leading to a mass of Aussie dollar sellers does not stack up with the Japanese example you offer. In the 1990s the Japanese economy was not doing well but the Yen kept rising.

Yes, the Yen kept rising because it had a huge C/A Surplus and Japs were taken their money honey to anchor their shitty position at home. Hence the appreciation of the yen. Go check and see what foreigners did though with their stock holding in Japan at the time. They sold them.

Whereas we have a C/A deficit. The opposite in fact would be the case. If foreigners felt we were about to go into recession and central banks raised rates you would be crushed getting in the way of the race to the door.

When you have a C/A deficit you are asking a foreigner to take one more risk than a domestic investor takes. You are asking them to take an exchange rate risk.

You need to explain why anyone in their right mind would take an exchange rate risk if they felt their potential returns in the stock market were going to get clocked.

Would you buy any of the bank stocks say if the RBA raised rates in that environment. I would try to mortgage my home and lease my family into slavery in order to raise money to short banks stocks if that was still allowed…. or buy puts in that scenario.

p.s. If the markets are predicting lower interest rates (inverted yield curve) that remains a prediction not an endorsement. If asked a week ago I would also have predicted that impending RBA action would lead to a fall in interest rates. I would not have betted on them increasing rates. I’m also predicting that Obama will win the US election but that’s not an endorsement either.

The long end of the yield curve is primarily affected by inflation expectations. To suggest that people are bidding down yields in the long end and mishaping the curve for your reason stands things on their heads.

Markets don’t need long-term rates to predict RBA actions they can do that in the short to medium term. The long end is primarily an inflation expectations play.

Furthermore the yield curve has been inverted while the RBA continued to raise rates which was hardly predicting what you’re suggesting.

I accept your comment at #41 regarding the long end of the yield curve however it does not address my main point at #39.

Also to be clear an interest rate of X% may represent loose money at one time and tight money at a different time. However if the RBA itself has indicated that it’s policy setting will take it above it’s inflation target band (ie loose money) then any subsequent contraction is not going to help us to avoid inflation (as suggested by DavidL).

However if the RBA itself has indicated that it’s policy setting will take it above it’s inflation target band (ie loose money) then any subsequent contraction is not going to help us to avoid inflation (as suggested by DavidL).

Did the RBA say that?

The RBA would be made to believe we will experience CPI rises in the future because it isn’t going to happen. CPI will be well within the band before you know it.

Rates will be at 3% before they are done which I think is why the Aussie collapsed.

Terje, in the long run inflation is a monetary phenomenon agreed? You can increase the quantity of money relative to goods by printing money or producing less goods, which I believe is your point about the contraction.
However, the real nexus is with the quantity of money seeking goods, and another feature of contractions is liquidity preference, which is disinflationary. Also, the liquidation of the bad investments is disinflationary as it results in factors of production seeking new employment thus increasing the supply of goods and services for use in production.
The amount of inflation or deflation is an emergent property from complex causes and so you need the “everything else being equal” qualification for your statement, but of course everything else is not equal.

JC, a change in the exchange rate must impact on inflation, but I think your point is that the impact might not be noticed because of other things happening in the world economy. In the long run it does not have a continuing impact because we adjust to the change in material circumstances following from the reduction in buying power.

Pedro – yes the world is dynamic and other things are not always equal. However if they were all equal then contraction would be inflationary. As such I wasn’t prepared to allow DavidL to get away with claiming that a national contraction would typically be disinflationary.

Pommy – in the intro to comment #49 Pedro has summed up the logic nicely. A decline in goods to market (ie a fall in GDP otherwise known as a contraction) means less goods chasing money. Hence inflation.

However I can help further with why this is counter intuitive. And that is because there is a difference between what happens when you get a contraction that spans an entire currency zone (typically a national economy) versus what you get when a region within a currency zone contracts. If for example the economy of Dubbo was to contract whilst the rest of Australia was motoring along nicely then there would quickly be less currency in the Dubbo region. And in fact so long as imports remained at the previous level there would be a net outflow of currency from the region and a decline (or downward pressure) in the price of locally produced goods (eg local labour and services). The net effect over time has to be deflationary else local wages could continue to demand more imports than the comparable exports of the region. Within a common currency zone any trade imbalance between regions is dealt with by an adjustment in the price of goods and services and ultimately in nominal (and real) income. Of course this implies a sustained contraction.

When the world was on a common unit of account (ie prior to 1970) then a contraction within any one nation typically implied an outflow of currency that compensated for the decline in output. The price of imports would remain the same but there would in time be downward pressure on the price of domestic goods and services (ie local labour) due to the currency outflow which would compensate the inflationary nature of contraction. Prior to 1970 the behaviour of any one nation was much like the current behaviour of Dubbo. And of course this was one of the rationalisations for floating currencies. Carried to it’s logical extreme this argument would suggest that Dubbo should have a different currency to Sydney. Of course there are many counter arguements which is why the EU now has a common currency across many nations and why most of the world had a common currency for several centuries and why Dubbo and Sydney use a common currency.

Terge, with free banking Dubbo can have its own currency! I s’pose it would be the Dubboloon.
In defence of DavidL, our long discussion on the point has led as to agree that all else being equal, a contraction in production is inflationary, but seeing all else is not equal, and you did not make the qualification from the start, David’s and my queries on your point are understandable.
As for your illustration of currency flows, it will be interesting to see if the Euro survives. As I recall, the justification was political more than economic and opponents worried (among other things) about the stresses arising from big swings in relative economic performance.

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